This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 11-16(20 min.)Disposal of assets.1.This is an unfortunate situation, yet the $75,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favor of remachining is $2,000:(a)(b)RemachineScrapFuture revenues$30,000$3,000Deduct future costs25,000–Operating income$ 5,000$3,000Difference in favor of remachining$2,0002.This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decision. The difference in relevant costs in favor of rebuilding is $5,000 as follows:(a)(b)ReplaceRebuild New truck$105,000–Deduct current disposalprice of existing truck15,000–Rebuild existing truck–$85,000$ 90,000$85,000Difference in favor of rebuilding$5,000Note, here, that the current disposal price of $15,000 is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.11-17...
View Full Document
- Fall '09
- Revenue, Variable Manufacturing, relevant costs, AP Manufacturing